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Gainful Employment Rule Redux

posted by Jean Braucher

It’s time for us to pick up this story again. Late last week, the U.S. Department of Education finally released an 841-page notice of a new proposed final Gainful Employment Rule (GER) aimed at predatory, debt-laden higher education, particularly at for-profit colleges.  The for-profits enroll about 13 percent of the total higher education population but account for about 31 percent of all student loans and nearly half of all loan defaults.

The new rule seems to have a better chance of withstanding an inevitable legal challenge than DOE’s 2012 version, and it gets tougher on career colleges in a few ways outlined below, although it's still pretty forgiving to the colleges.

The regulation would apply not just to the for-profits but also to certain non-degree certificate programs at public and non-profit schools, both of which are expected to pass muster under the rule at a higher rate than the for-profit schools.  Based on FY 2010, four million students attend all “gainful employment” programs, which receive about $36 billion a year in federal student grant and loan funds, $26 billion of that in loans that students can’t discharge in bankruptcy absent “undue hardship.”

In a challenge brought by the for-profit industry, the DOE’s first attempt at a GER was largely struck down by a federal district court judge in June of 2012, but the decision upheld both the agency’s general authority to make such a rule and one of the tests it had proposed, providing a roadmap for a legally defensible regulation.  The department reopened rule-making last year.  Attempts to reach consensus with affected interests in a negotiated rule-making process predictably failed in December, and now DOE is going ahead anyway, as it is empowered to do.

The DOE said Friday its aim is “to address growing concerns about burdensome student loan debt by requiring career colleges to do a better job of preparing students for gainful employment—or risk losing access to taxpayer-funded federal student aid.”  It also noted that the majority of for-profit gainful employment programs produce graduates who on average earn less than high school dropouts.

About 20 percent of for-profits and 16 of all covered programs are expected to fail the rather minimalist new standards, assuming the schools do not quickly change to remain eligible for federal Higher Education Act grant and loan funds.  For-profits in particular use a business model of maximizing receipt of federal funds, so the proposed regulation has their full attention.  Of the sectors of higher education, for-profits have both the highest levels of indebtedness and highest default rates. 

Under the new GER, schools generally must pass one of two debt to earnings (D/E) measures—typical program completers must pay no more than eight percent of annual earnings or 20 percent of disposable income to service their student loan debt.  Schools must meet one of these tests for two out of three years.  (There is another D/E test that must also be met—that over four years, the program, even if it avoids two consecutive years of a failing D/E ratio, must not be within a slightly higher D/E zone for four consecutive years.)  The other test, known as the program cohort default rate (PCDR), requires that the program’s default rate in the first two years after the year students enter repayment can’t exceed 30 percent (a minimal standard, in that default rates don’t count a lot of people who aren’t paying—for example because they have deferments, forbearances, or are delinquent but not considered in default for up to a year).

The new rule gets tougher on career colleges in a few ways.  The D/E tests have been lowered from 12 percent of annual earnings (to 8 percent) and 30 percent of disposable income (to 20 percent) and now reflect the research-based standards (of manageable debt) that the first GER loosened by 50 percent.  The rule also shortens from four to three years the period over which the D/E ratios are measured, meaning that schools can be excluded from receiving federal student aid funds more quickly.  A particularly good change is that the rule requires schools to certify that their programs meet applicable accreditation and federal and state licensing standards for the occupation the program supposedly trains students to enter, addressing a kind of deception that had left students with debt for programs that didn’t meet those basic standards.

The new GER gets rid of the repayment test thatwas controversial in the 2012 version and instead uses PCDR, which should easily pass legal muster because it is used in the High Education Act itself.   On the other hand, the PCDR is made an independent test that must be met in addition to the D/E test, whereas the earlier rule allowed schools to remain eligible for federal student aid funds if they met either a D/E test or a repayment test.  The district court decision had found the D/E test legally justified but struck it down anyway because it was intertwined with a repayment test—a problem the new rule avoids by having two tests (D/E and PCDR), each of which must be met.

If this explanation is giving you a headache, you should understand that I’ve deliberately left out a lot more technical details about how each of these tests works.

Once the notice is published in the Federal Register, the new GER will go into a 60-day comment period, possibly with some adjustment of the proposed rule to follow.  Most observers are also expecting another legal challenge by the industry.

And before the comments on this blog start with an industry talking point that all of higher education should be subject to the GER, let me say I intend to address that debate in a future post. 



About dam time.

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